Cellular and molecular aspects of chemical carcinogenesis in lining epithelia are studied in mouse epidermis by in vivo and in vitro techniques. The initiation event in skin carcinogenesis is highly correlated to an alteration in the program of terminal differentiation of epidermal cells. In cell culture, epidermal differentiation is regulated by the concentration of extracellular Ca2+. Ca2+ concentrations which induce epidermal differentiation activate phospholipase C which catalyzes the metabolism of phosphatidylinositol. The consequent generation of diacylglycerol activates protein kinase C which serves as a second messenger in epidermal differentiation. Epidermal differentiation is associated with the modulation of expression of specific genes, including a gene coding for a precursor protein for cornified envelope assembly and a protease inhibitor gene. The expression of these genes is also modified in epidermal tumors. The ras oncogene is highly correlated to the initiated phenotype in epidermis. Introduction of an activated ras gene into normal keratinocytes converts them into papilloma cells. Chemically induced papillomas yield an activated ras oncogene with a mutation at codon 61. The activation of a ras oncogene in papilloma cells is associated with the expression of a unique keratin protein which is normally expressed only in simple epithelia. Papilloma cells and initiated cells are resistant to the differentiation-inducing effects of phorbol ester tumor promoters and to the cytotoxic effects of benzoyl peroxide. Since phorbol esters induce differentiation in normal cells, papilloma cells can be selected among an excess of normal cells in culture by their ability to continue to proliferate in culture medium containing phorbol esters. In vivo, several classes of benign tumors can be induced by initiation and promotion. Tumors can be subdivided into those with a high risk for malignant progression and those with a very low risk for malignant progression. Future studies are designed to determine whether a specific set of genes, which predetermine the biologic potential of the tumor cell, is activated during initiation.